Where to Next for Inflation & Equities..?

Cash rates globally have increased rapidly since early 2022, and whilst they’re still low by historical standards, it has certainly created a great deal of volatility across equity and fixed-income markets across the globe.

With higher inflation expectations looking likely to remain for the short to medium term, and interest rates unlikely to return to the emergency levels that we saw during Covid-19, what does this mean for investors and how should we be looking to position our portfolios?

Firstly, let’s take a look at what’s happening in Australia

On the domestic front in Australia, we have seen the cash rate increase from the record low level of 0.1% to 2.85% as of November 2022, and this has seen mortgage rates increase from the high 1’s and low 2’s, to a point where borrowers are lucky if their current rate begins with a 4.

Since the beginning of 2022, we have seen the All Ordinaries decline by approximately 7.3%, which has been relatively resilient when compared with many other global markets. It has also been highlighted that the Reserve Bank of Australia (RBA) was caught relatively flat-footed, and was perhaps late to the party in terms of Monetary tightening and increasing the cash rate.

Let’s have a look across the globe

We have seen most major central banks across the globe increase their cash rate in an effort to curb inflation this year. The Federal Reserve in the US has increased the cash rate to 4%, the Bank of England has increased the rate to 3%, the Bank of Canada to 3.75%, and the Reserve Bank of New Zealand, which started increasing their cash rate earlier than most currently sits at 3.5%.

Source: Bloomberg 2022

These rate increases will likely start to curb consumer spending over the next 12 months, particularly the more indebted households. It’s worth pointing out here, that the Federal Reserve is often far more aggressive with their rate increases to curb inflation when compared to Australia, as in Australia there is a much higher portion of borrowers on variable rate loans, and therefore feel the impact of rate increases much faster.

How has rising inflation impacted markets historically?

If we look back over the last 100 years, we can see the opportunities that can be created during periods of high inflation for investors with a medium to long-term view. As you’ll see, even though inflation and as a result the cash rate has been higher, average investor returns during these periods were 11.5% per annum.

Source: BlackRock Fundamental Equities

What should investors be doing?

Rising inflation levels, and as a result interest rates, have seen a significant sell-off in many ‘growth assets’, particularly those at more lofty valuations such as the technology sector, with the NASDAQ seeing a decline of over 28% year to date. This has led to many investors being more cautious with their portfolios, and in the manner in which they chase returns.

From our perspective, we see those companies and sectors with strong financials, resilience in terms of their sales and revenues in a rising inflation environment, low and manageable debt levels, and reasonable valuations being on the radars of many investors looking forward and see opportunities across most markets in this current environment.

To Your Financial Success!

Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd - No: 200305462G | MAS License No: FA100035-3

Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.

To learn more about how we may be able to help you, please contact us:

✆        +65 8282 5702

✉        jarrad.brown@gfcadvice.com

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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.

*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.

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